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Product Liability Risks in the Evolving Cannabis Industry

iStock-957380266-recall-cannabis-300x300Cannabis is now fully legal in ten states plus the District of Columbia, and medical marijuana is legal in 23 states. Despite growing acceptance among states, cannabis remains illegal federally under the Controlled Substances Act of 1970 as a Schedule 1 substance, which has made oversight and regulation of the industry decentralized and in some instances non-existent. The psychoactive effects of cannabis, coupled with limited regulation, imposes increased risk of product liability claims. To mitigate this risk, industry members should take steps to self-regulate.

The ever-changing legal landscape is a boon for the commercial cannabis industry. The rapid growth of the industry and lack of regulation is reminiscent of the dietary supplement industry in the early 1990s. Following the passage of the Federal Dietary Supplement Health and Education Act in 1994, the supplement industry boomed. Under the Act, any supplement marketed before 1994 was grandfathered into the Act and did not require FDA approval before marketing. The largely unregulated industry catered to opportunistic businesses that sold potentially dangerous supplements without suffering any real consequences. Although extensive litigation in the early 2000s helped address some of the bad actors and police the industry, many of the companies involved had inadequate insurance coverage, forcing them into a bankruptcy. A similar fate for cannabis businesses is a real concern.

Although only a few product liability suits involving cannabis have been filed and/or reported to date, the number of cannabis-related product liability cases will likely increase as the industry matures and more manufacturers, producers and retailers with deeper pockets join the market.

Unlike the dietary supplement industry, the cannabis industry has taken some steps toward self-regulation. California, for example, passed the Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) to create a framework for the regulation of commercial medicinal and adult use cannabis in California. Regulation has also taken the form of recalls, with more than 40 cannabis product recalls in Colorado since 2015. Many consumers are unaware that edible cannabis can take significantly longer to affect them than other methods of consumption. Thus, some industry members are working to adopt strict dosage limits. The concept of “microdosing” edible products in quantities as small as 1mg THC is also being considered.

Despite these positive self-regulating developments, the risk of product liability claims remains high. And while most commercial businesses would elect to obtain business liability and property insurance as protection against risks like product liability claims, most cannabis businesses will struggle to secure adequate coverage. Either insurers will not write the policies (forcing business to seek coverage from “surplus lines” companies that sell specialized types of coverage specifically for marijuana-related companies) or standard policy exclusions will render coverage illusory (as most standard commercial general liability insurance policies contain exclusions for Schedule 1 substances).

Several states, including Maine, Massachusetts and Washington, have enacted legislation requiring cannabis businesses to obtain insurance with specific limits. Other states, such as California and Maryland, are in the process of establishing insurance requirements. Legislative changes will necessarily spur policy reform for the cannabis industry, but the changes likely won’t be immediate, leaving many cannabis businesses without adequate coverage.

Until the cannabis insurance market improves to keep pace with the ever-increasing product liability risks, industry members should continue to take steps to self-regulate and voluntarily recall mislabeled, tainted or unreasonably dangerous products. In particular, developing a recall action plan can reduce the risk of further damage in the face of a product liability crisis. Recall plans should include the following steps:

1. Develop an overall recall strategy.

2. Create Definitions and Standards for different classes of recall.

a) Consult state and local laws regarding cannabis businesses and regulations.
b) If no state or local laws exist, look to food or drug recalls for general guidance.

3. Appoint individuals within your company to lead the recall plan.

4. Devise a system to receive, process and evaluate complaints regarding the product.

5. Implement a complaint investigation protocol, including fact gathering procedures, investigation, and testing mechanisms.

6. Create a Distribution List (e.g., government agencies, distributors, retails, customers, press) and provide timely notice to all appropriate parties in the event of a recall.

7. Recover recalled stock, so that all tainted product is removed from sale and distribution.

a) Include procedures for disposition of the recalled product.
b) Ensure that disposition procedures comply with all state and local regulations.

8. Immediately alert outside advisors (attorneys, insurance brokers, funding institutions or partners) regarding any recall.

9. Record and document all steps undertaken as part of the recall. If legal action ensues, you want to have evidence that you took all reasonable steps to ensure consumer safety.

Absent sweeping legislative changes or insurance reform, self-regulation and strategic business decisions to reduce risk are the best safeguards for cannabis businesses.